Appraisal Process a Kangaroo Court
Once deemed a plain, speedy, inexpensive and just method to determine the extent of an insured’s loss, the appraisal process in Minnesota has morphed into a kangaroo court, propagating the unauthorized practice of law by a handful of insurance-industry contractors.
Unlike Minnesota’s no-fault arbitration system, the appraisal process is not governed by lawyers, there are no formal rules of procedure, evidence, or decorum, no established basis for findings, no formal roster of neutrals for appraisers or umpires, and no oversight by any standing committee. Yet, appraisals in Minnesota are dictated by non-lawyer insurance company representatives who cite and interpret case law, make evidentiary rulings, and take testimony from adjusters, contractors, engineers and policyholders. This unauthorized practice of law has created a cottage industry for a handful of participants, and it demands review and continuing scrutiny.
In property insurance claims, when a policyholder disagrees with an insurance company over the amount of loss, Minnesota’s Standard Fire Insurance Policy provides an alternative process for resolving such disputes called “appraisal.” If an appraisal is demanded by either party, each party must hire and pay for an appraiser and split the cost of a neutral umpire to create a three-person appraisal panel. By statute, the two appraisers are supposed to separately appraise the loss and submit their differences only to the umpire for resolution. In practice, the two appraisers serve as de facto advocates for whichever party is paying their bill and participate in the unauthorized practice of law.
To be an appraiser, a person does not need to have any special knowledge or skill concerning the damaged property being appraised, and he or she does not need to be capable of performing any of the actual repair work being estimated. The only legal qualifications to be an appraiser are disinterest and willingness to act. Although appraisers are always willing to collect their fees, they are seldom, if ever, disinterested. In practice, an appraiser is hired to represent the party that appointed him or her before the umpire to award as little money as possible if representing the insurance company, or as much money as possible if representing the policyholder.
The problem with the current appraisal process as practiced in Minnesota is the lack of rules and oversight, which has created a perverse forum dominated by insurance company representatives who act as judge and jury. As a practical matter, most policyholders will only know what their insurance company tells them about the process. Taking full advantage of unrepresented policyholders, insurance company appraisers will often dictate the scope of the appraisal, who can serve as umpire, who can serve as an appraiser for the policyholder, what evidence can be considered, and how case law and the insurance policy is to be interpreted. Without any licensed lawyers or sitting judges to say otherwise, policyholders are at the mercy of their insurance company in an appraisal, which is why insurance companies love appraisals.
There are several practitioners that will concede that the appraisal process is not perfect, but defend the process as the best process we have come up with to resolve such disputes.
We disagree. We already have an orderly process for resolving disputes, in a forum run by lawyers and judges, who are licensed and held accountable, a forum with formal rules of procedure, evidence, and decorum, and a forum that is open to the public and creates a record for scrutiny and appeal. We have the district courts.
At the very least some governing rules must be promulgated. Appraisers and umpires must be required to engage in annual conflict resolution training. A roster of approved appraisers and umpires must be maintained by the Minnesota Department of Commerce. Policyholders must be allowed to strike appraisers or umpires who are employed predominantly by insurance companies. All appraisers and umpires must disclose all their employments within the last 24 months of the appraisal. Appraisers and umpires who engage in unauthorized practice of law must be removed from the roster.
Alternatively, the parties could eliminate the two appraisers and just hire a neutral umpire to determine the amount of loss. Such a system could be similar to the Home Warranty Dispute Resolution Process employed by the Department of Labor & Industry.
Rather than trying to re-invent a forum for resolving disputes, policyholders should seek a level playing field, which is found in a courtroom with a licensed lawyer and an actual judge and jury. Until the appraisal process is rehabilitated, with transparent rules and oversight to hold the participants accountable, the insurance-company-run appraisal process should be avoided by policyholders whenever possible. Meanwhile, the unauthorized practice of law will need to stop.